I want to know about systematic investment plans (SIPs) in detail. What are the things that I should keep in mind while starting investments in a fund via SIP?

—Neeraj Srivastava

SIPs are nothing but a method of investing a fixed amount in a mutual fund periodically, say, every month. So, for example, if you invest Rs5,000 in Franklin India Blue Chip fund on the fifth of every month, then you are said to be doing an SIP on this fund.

If you are familiar with the concept of recurring deposits in banks, then SIPs are similar to that, except that the money does not go to a deposit, but to a mutual fund investment. There are several advantages to doing an SIP when it comes to investing in mutual funds, especially in those that invest in the stock market (equity mutual funds).

First, it lets you invest in a convenient manner—essentially, converting the monthly savings from your salary into investments. Second, it creates a sense of discipline. SIP investments are often done using a bank mandate, which means that your investment money (say, Rs5,000) gets automatically debited from your bank account on a particular day (say, the 5th) and is invested without any effort from you. So, you can just start the SIP and relax while the investment process takes care of itself.

Third, and probably most importantly, investing in the stock market using SIP gives you the benefit of averaging your cost of purchase and lowers the ‘timing risk’ of your investments. The stock market goes up and down due to various factors, and rather than investing in a fund by guessing whether the market is up or not, SIP takes out the guesswork and makes investing a methodical process free of emotion. This means that you can let the law of probability work for you and yield an average cost for your investment. You can also think of it this way—a mutual fund itself gives you diversification in the form of investing in multiple financial instruments. Investing in a fund using SIP gives you another dimension of diversification in the form of investing at different times.

Before you get started with an SIP in a fund, ensure that the scheme you choose is appropriate for your requirements. If you are investing for the long haul (5 years or more), then you can confidently go for a diversified equity fund such as Birla Sun Life Frontline Equity Fund. If you are investing for a shorter duration, a fund that has equity and debt, such as Tata Balanced Fund, would be a better option. Choosing the right type of fund and a good fund in that type is the first thing you should do, and that would depend on how long you are going to be investing for. After you choose the fund, you can either start the SIP directly by going to the fund house or you could go through a distributor or distribution platform to help you out with the process. You may have to go through a know-your-customer (KYC) process if this is your first investment into mutual funds.

What are satellite and core funds? I am 31 years old and earn about Rs60,000 a month. What would be better for me?

—Kiran Bose

The core and satellite approach to designing portfolios is a time-tested approach to managing investments. The central idea is to have a significant portion of your portfolio anointed as the ‘core’ portfolio and the rest as the ‘satellite’.

The core will form 70-80% of the portfolio, and will consist of long-term, low-maintenance, and relatively low-risk investments. The rest 20-30% of the portfolio will be the ‘satellite’ portion of the portfolio and will consist of investments that will be of a risk level that is a notch or two higher than that of the core portfolio.

This portion of the portfolio will potentially yield higher returns compared to the core portion, but will also be subject to more volatility. The satellite portion of the portfolio will thus allow the investor to take some measured risks without large commitments.

In your case, as a young investor who is starting out, a good option would be to have a core portfolio with a couple of solid large-cap oriented funds such as Franklin India Blue Chip and SBI Magnum Equity fund. A single fund such as Mirae Asset Emerging Bluechip fund, from the mid-cap category, can form the satellite portion of your portfolio.

I am a regular (every month) investor in equity mutual funds. I invest in them heavily via SIPs. I also buy shares whenever the market falls. Should I continue with this approach to investing?

—Hiren Dharu

It is good that you have SIPs at the heart of your portfolio. Please persist with them and let them be the mainstay of your investments. It is fine to have some direct equity (stocks) exposure in your portfolio as well, especially if you know how to identify good stocks at advantageous valuations, or if you can get advice about identifying such opportunities.

Keep the amount of money you are investing in stocks to be about 10% of your overall portfolio and not more than that. Often, investors get tempted to invest more in stocks, especially if they see some outsized profits in bull market conditions.

Please resist that temptation and stay disciplined by keeping your allocation to direct equities at a set low percentage. It is best to leave portfolio management to the professionals.